Yellen testifies before Senate Banking on economic outlook

Federal Reserve Board Chair Janet L. Yellen appeared before a full hearing of the Senate Committee on Banking, Housing, and Urban Affairs to present her semi-annual report on the nation’s economic situation and outlook. In this mandated “Humphrey-Hawkins” testimony, she presented and discussed the Fed’s semiannual Monetary Policy Report.

According to Yellen’s testimony, the economy has continued to make progress toward the “dual-mandate objectives” of maximum employment and price stability. Yellen expects the economy to continue to expand at a “moderate” pace, with the job market strengthening further, and inflation “gradually rising to two percent.” Yellen reported that U.S. monetary policy remains accommodative, strengthening due to labor market conditions and a return to two percent inflation, and stated that the pace of global economic activity should pick up. Yellen cited the following sources of uncertainty: possible changes in U.S. fiscal and other policies; the future path of productivity growth; and developments abroad.

Time to reassess. Committee Chairman Mike Crapo (R-Idaho) delivered the opening remarks at the hearing, stating that it is “time to reassess what is working and what is not” regarding regulations put into place after the financial crisis. “We want our nation’s banks to be well-capitalized and well-regulated, without being drowned by unnecessary compliance costs. This is especially important for community banks and credit unions, which lack the personnel and infrastructure to handle the overwhelming regulatory burden of the past few years, yet in many ways are treated the same as the world’s biggest institutions,” said Crapo.

Crapo stated that the U.S. regulatory regime “should be properly tailored and avoid a one-size fits all approach.” He reiterated that, at the last Humphrey-Hawkins hearing, “Chair Yellen stated that simplifying regulations for community banks continues to be a focus for the Fed.” Crapo said he looks forward to “hearing from Chair Yellen on how the Fed plans to normalize monetary policy and wind down the Fed’s balance sheet.”

Crapo expressed concern over whether $50 billion is the “appropriate” SIFI threshold for regional banks. Crapo said he hopes Congress “can work together to craft a more appropriate standard.” Looking forward, Crapo said the banking committee “has a lot of work to do”—outlining plans to identify bipartisan bills that can progress quickly and plans to start work on housing finance reform, flood insurance, sanctions, and legislation to boost economic growth. “Housing finance reform remains the most significant piece of unfinished business following the crisis, and it is important to build bipartisan support for a path forward,” he stated.

Targeting reform safeguards. Ranking Member Sherrod Brown (D-Ohio) also spoke at the hearing, noting that the Fed raised the federal funds rate in December, for only the second time since the financial crisis, indicating that the economy has improved since the last such hearing in June 2016. He also spoke of uncertainty he sees in the country over the following issues. “Can Americans continue to count on having health insurance? Will U.S. manufacturers and exporters have continued access to foreign markets? Will importers have to pay a 20 percent sales tax? Will immigrants to this country have access to jobs and to our universities—something our economy is dependent on?”

Brown agreed that parts of Wall Street Reform could be improved and “steps … can be taken to help small banks and credit unions.” He expressed concern that safeguards put into place after the financial crisis are being targeted, such as higher capital requirements for large banks, mechanisms to identify and regulate risky nonbank companies, and tools to make sure financial firms can fail without bailouts funded by taxpayers. According to Brown, “American voters agree—80 percent, in one poll—that we need tough rules and stronger penalties on Wall Street.”

Current economic situation. Yellen discussed the current economic situation in her testimony. According to Yellen’s testimony:

Job gains averaged 190,000 per month over the second half of 2016, and the number of jobs rose an additional 227,000 in January.

Unemployment is more than 5 percentage points lower than where it stood at its peak in 2010.

A broad measure of labor underutilization has shown continued improvement over the past year.

The pace of wage growth has picked up.

Improvements in the labor market in recent years have been widespread, with large declines in the unemployment rates for all major demographic groups, including African Americans and Hispanics. (Yellen did note that jobless rates for those minorities remain significantly higher than the overall rate.)

Consumer spending continues to rise.

Income gains are steady.

U.S. real gross domestic product rose an estimate of 1.9 percent last year.

2016 sale of automobiles and light trucks were “the highest annual total on record.”

Business investment was “relatively soft” for much of the year.

Inflation was up in 2016.

Yellen stated that the Federal Open Market Committee maintained an unchanged target range for the federal funds rate for most of the year in order to support improvement in the labor market and an increase in inflation toward two percent. In December, the Committee raised the target range for the federal funds rate by 1/4 percentage point, to 1/2 to 3/4 percent.

Yellen stated that she expects the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives. She said that the FOMC will evaluate “whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”